Costing and Pricing

The right pricing and the way you provide quotes for your products or services are both crucial to developing a successful and ongoing export business.

(Please read-on, or if you prefer click here for a video on the subject.)

Export pricing

Export pricing and domestic pricing are different: different overseas market conditions, different costs, different quoting formats and different currencies all affect what you charge your customers for your products or services. Pricing for any market requires an understanding of the relative costs, demand and competition of that market.

Many overseas contacts you meet will want to know your price, so it is essential to have your pricing determined before you approach an overseas market.

The total cost of exporting

Before you can determine the prices you should be charging for your goods or services, you must first be clear about the total cost to your business of exporting that product or service.

Developing your export markets can involve a range of costs that do not apply to domestic sales. These are general costs for exporting that are not specific to an individual contract or shipment. They could be considered your ‘fixed costs’ of exporting. How much you recover of these costs per unit or per order or contract is up to you, but these costs should be factored in before you start adding shipping costs, duties, etc. Costs may include:

•  Research into international markets
•  Travel to overseas markets
•  International communications
•  Production of export literature (including translations)
•  Modifications to your product or service
•  Packaging and labeling (products)
•  Product liability insurance or other insurances
•  Compliance with foreign standards
•  Credit checking
•  Export financing charges
•  Promotional costs

Different prices for different markets

Calculating a separate price for each of your export markets is important because:

•  For products, distributor, wholesale and retail mark-ups are often different in each market and industry, which will affect the final price of your products. Remember to include questions about these mark-up costs when you are doing your initial market research.

•  Your competitors and the way they price their products or services will probably be different in different markets, and you have to take this into account when setting your prices.

•  The price that end users are willing to pay for your products or services will not be the same in all markets around the world.

Price changes

Exporters need to adjust prices for many reasons including increases in the cost of production such as raw materials, currency fluctuations and inflationary increases. But customers don’t like surprises and although price increases are part of doing business, it’s wise to give as much notice as possible.

You will need to advise your customers or in-market partners when your prices change – and why. You will also need to give sufficient lead time for buyers to be able to pass price changes on to their customers.

Extending credit terms will have a real cost impact

As an exporter you may be asked to offer credit terms. Or you may find that you need to match your competitors on credit terms.

Extending credit terms will have a real cost impact on your company because cash flow is critical to any business.

If you decide to offer credit terms you will have to estimate the cost of the time it takes to receive payment at the end of the credit period and build this cost into your price.

It’s not always all about price

Although some products are sold purely on the basis of price, many exporters find that price is not the only factor that affects their success in attracting new customers. Credit terms, delivery speed and reliability, customer service and warranty, after-sales care and the quality of your product or service are all important in getting and keeping new international business.

Pricing for products

While most businesses spend the necessary time to gain a thorough understanding of price calculations for their domestic business, many do not put in the same amount of effort when it comes to their export markets.

Unfortunately, this can have a flow-on effect on both competitiveness and the profitability of the business.

Although some exporters simply charge their domestic price with no further thought, those who are successful over the longer term have almost always invested the necessary time to get their export pricing right.

Pro-forma Invoices

All export quotations should be made with a Pro-forma Invoice. Pro-formas are actually not invoices at all, but formal export price quotations that spell out precisely what is proposed in the quotation, including the full product description, shipping terms, and terms of sale.

Pro-forma quotations ensure that both the buyer and the seller are clear about who pays for which costs, and where ownership transfers from seller to buyer, exporters use terms known as Incoterms.

(More information on Pro-forma invoices is in our free webinar on export documents.)

Costs to include when setting export prices

Regardless of who arranges and pays for freight and costs such as import duties, you should know the costs your product attracts through the supply chain. Without knowing these costs, you can’t fully understand where your product fits into the market and therefore compare your price against those of your competitors.

Some examples of costs in the supply chain include:

•  Shipping ex-factory to port of departure
•  Air or sea freight and insurance
•  Import duty and taxes
•  Customs clearance/broker fee
•  Ground transportation from port of entry to the warehouse or the customer
•  Warehouse fees
•  Break-bulk fees, if third party warehouse applies
•  Agent’s commission or importer’s mark-up

Incoterms

Some common Incoterms you may have heard mentioned include FOB and CIF. It is very important that exporters understand the details of each Incoterm they may use and their responsibility for each one.

(Please read-on, or if you prefer click here for a webinar on the subject.)

One common mistake, that can lead to confusion, is not including a named place after the Incoterm. If you are using FOB and shipping from Savannah, GA, then the correct way to communicate this is FOB Savannah. Not including a named place here means the buyer will not know where they have to arrange and pay for freight from.

Which Incoterm you use depends on your situation and that of the buyer. Whilst there is no rule about which Incoterm should be used for particular countries or industries, buyers will most likely have a strong preference for how they buy from overseas. Some Incoterms result in less effort for the customer, so require more arrangements to be made from the exporters’ side. This may be a good customer service offering from your business should buyers be seeking to have goods delivered right through to their door.

The most recent version of Incoterms is Incoterms 2010. For more details and some tips see the International Chamber of Commerce (ICC) website.

Export price lists and written quotations

Some tips for preparing an export price list:

•  Show which currency you are quoting in. If at all possible quote in US dollars, as this protects you against fluctuations in foreign currencies.
•  Even if Incoterms are used, when quoting it is recommended include clear details about what the price includes as some buyers may have incorrect understanding of the terms used. An explanation should be included in your price lists and contracts as well.
•  Include validity for pricing, when is the price list valid until?
•  Include any minimum order quantities you may require or quantity the pricing is based on
•  Item codes make it easier for buyers to place an order and result in less confusion
•  Clearly show your company name, address (including USA) and contact details for placing an order or inquiry

Two different methods for calculating prices for products

While there are many different ways for calculating prices, the methods listed below are some of the most common. Cost Plus and Top Down are two of the best costing methods to calculate your export price, but they are best used in parallel; do two separate calculations and then compare one against the other to achieve a finely-balanced result. Here is what you do:

     1. Cost Plus:
you work outwards from your ex-factory price to the end customer.
     2. Top Down: you work from the ideal end customer price backwards to you.

The reason that these two methods in parallel are better than using one method alone is that each method individually has its weaknesses.

Using the Cost Plus method alone, for example, may result in a price that is too high, which means that you won’t have many customers. And, if you sell at a price that customers would ideally like and calculate by using the Top Down method, you may end up losing money on each order.

So, calculating your final selling price between Cost Plus and Top Down is a balancing act that all sellers must face.

Some tips about export pricing

•  Set a price that reflects your brand and promotion, but bear in mind that an unknown brand from the US may not be able to charge the same prices as well-known competitors, particularly those in-market.

•  Before you start quoting prices to your customers, be sure to factor in the promotional costs associated with supporting your products in-market.

•  You could create a problem for yourself if you quote a low price initially in order to get business, and assume that your prices will naturally increase over time. Buyers tend to expect the exact opposite: that is, they expect to get a price reduction to reward them for ongoing business, particularly if their orders increase in size and volume.

•  It is important that you know your profit margins and break even points; if you don’t have this information readily to hand you will not be able to make an informed decision if a customer asks you for a discount.

•  Discounts are a cost; before you offer a discount to a customer reflect on the effect it will have on your bottom-line.

•  The wise exporter learns about Incoterms so that they can quote using the correct international trade language. Both you and your customers should know who pays for what, and be absolutely clear at what precise point in the transaction ownership of the goods transfers from you to your customer.

•  If you have a website and successfully sell on-line you need to be careful that you don’t undercut either your in-market suppliers or in-market retailers.

•  And a final tip? We know that shipping costs can change quickly and exchange rates can fluctuate alarmingly. Both of these will affect your end costs, so be sure to regularly review your prices.

Pricing for services

A service export is an activity where there is a high degree of human involvement in the development and delivery of that activity. What is being provided tends to be less tangible (than products) and there is more variability in quality.

Pricing considerations may include:

•  Specific costs associated with services – withholding tax, visas, flights, establishing a presence (local or virtual), accommodation, transport, pre-sales visits, freight, insurance, wages, translation, IP protection, currency/exchange rates.
•  Business and cultural practices specific to the country eg. fixed price or negotiable, pre-sales effort required.
•  Competition within the market – local and international companies.
•  Ease of entering markets – local barriers, regulations, language etc.
•  Maturity of your industry in the target market – frontier v’s established.
•  Unique service offering – ability to charge premium prices, perception you want to create about the service offering.
•  Accounting for after sales costs.
•  Meeting the costs of complying with applicable international standards.
•  Opportunity costs – impact on domestic business, existing commitments, hiring of additional local staff.

Pricing models for services:

Cost plus – Cost plus pricing requires an accurate understanding of your total costs for delivering the service into the target market and ensuring sales success. Once the cost is decided, then a margin is added to reflect a price that is compatible with your perceived market position. It is important that you have an understanding of the average margin for your industry in the export market. In calculating cost plus you:

• need a good understanding of costs, margins and overseas expenses
• may not be competitive in some markets (under or over-priced).

You might be able to reduce the price or match a competitor’s price if local resources are cheaper than in America. Calculate final pricing by finding a balance between affordability for customers and your profit. As your company’s presence in an export market matures, you may revise pricing strategies for existing and new services.

Tips about export pricing for services

• Set a price that reflects your brand and promotion, but bear in mind that an unknown brand from America may not be able to charge the same prices as well-known competitors, particularly those in-market.
• Before you start quoting prices to your customers, be sure to factor in the promotional costs associated with supporting your services in-market.
• You could create a problem for yourself if you quote a low price initially in order to get business, and assume that your prices will naturally increase over time. Buyers tend to expect the exact opposite: that is, they expect to get a price reduction to reward them for ongoing business, particularly if the amount of business they give you increase in size.
• It is important that you know your profit margins and break even points; if you don’t have this information readily to hand you will not be able to make an informed decision if a customer asks you for a discount.
• Discounts are a cost; before you offer a discount to a customer, reflect on the effect it will have on your bottom-line.

You should speak to your bank about the options they may suggest based on your circumstances.

What you need to know about foreign bribery and its implications:

Bribing, attempting to bribe or facilitating bribery of a foreign public official is a serious crime punishable by the US Foreign Corruption Practices Law. Companies can also be held criminally responsible for the acts of their agents. The extraterritorial nature of these penalties reflects the serious criminal nature of bribery and the detrimental effects it has on US trade.